Less than a week before Tesla Motors — the darling of the emerging electric car industry — is scheduled to go public (June 29), reporters and analysts are still divided on whether the sale will soar or not. But activity on secondary market sites, where private shares of the company have been traded for months, suggests that Tesla’s sexy products and perennial buzz may be enough to carry off a lucrative IPO.
Right now, the company is looking for about $178 million, hoping to sell 11.1 million shares for between $14 and $16 apiece, leaning toward the $16.
Apparently, Tesla’s dual announcement that it is partnering with Toyota to build a new line of cars, and that it will reopen the shuttered automotive NUMMI plant in Fremont, Calif., has had the intended effect: more hype and more confidence that the company is going places. Toyota also pledged to buy a $50 million stake in the company after its market debut.
“There has been a significant amount of interest among the high net worth community, and there was an explosion of interest after the Toyota-NUMMI announcement came out,” says Greg Dietrick, the broker on secondary market site SharesPost that oversees Tesla transactions — and the company’s discussion forum. “There’s an increased number of posts in general, and a big increase in the number of buyers.”
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SharesPost has just published a report from NeXt Up! Research that values Tesla at $1.84 billion.
“It became a much hotter prospect as soon as Toyota put its seal of approval on it,” Dietrick says. “Getting that sort of approval from the auto industry makes Tesla look like a more viable business — that seems to be what a lot of investors are thinking.”
Apparently, these prospective investors have not been deterred by subsequent reports that the Tesla-Toyota deal is not as official as it initially appeared. While the major car maker will be ponying up the $50 million, there is no written agreement between the two companies to build cars together. In fact, some analysts say Toyota was never that gung-ho about building a car with Tesla to begin with.
“I think there is mutual interest, but Toyota will be conservative and use this relationship to monitor how Tesla does, whether it meets delivery deadlines, or if the Model S is successful when it comes out,” says John Gartner, an analyst at cleantech-focused Pike Research. “Until all of that is proven, I don’t think Toyota will take that next step.”
This raises a number of concerns about how Tesla will afford the NUMMI plant long-term. Its Model S sedan is not coming out for another two years at least, and even then only 20,000 units will be produced at the facility, which has a capacity to build 500,000 cars a year. The $465 million loan it got from the U.S. Department of Energy is covering a lot of the upfront costs, but eventually that money will have to be paid back.
It’s important to note that when sites like SharesPost report a spike in investor interest, they are doing so based solely on bulletin board discussions and the number of research downloads, not actual transactions. The IPO’s underwriters locked up shares in late January when the S-1 was originally filed, preventing trades.
Investors who purchased shares in advance of the lockup must also hold onto their shares for a year after the public sale, according to Larry Butler, CEO of TrashTalkFCM, and one such owner of private Tesla shares.
“The underwriters do this around the same time as the S-1 filing so that they can easily locate all the shares that are out there when it comes time to register them,” says Dietrick, who adds that this is a pretty standard practice for investment banks. Tesla’s underwriters include Goldman Sachs, JP Morgan, Morgan Stanley and Deutsche Bank Securities.
“Based on everything I’ve seen on SharesPost, particularly the increased buyer interest, I think it will be a hot IPO,” Dietrick says, adding that he has heard mixed opinions, particularly from some of his colleagues on Wall Street who think the sale will be lackluster — mostly because the IPO market as a whole has been bleak for a while.
Butler, who has bought two tranches of Tesla shares via SharesPost, is very representative of how Dietrick perceives buyers.
“I bought it because it is the biggest name in electric cars,” Butler says. “It’s a sexy product, and I like that its name has a lot of resonance on the retail stock market. I think it will get a bounce in its valuation because most people have heard of the company.”
He is also unphased by the fact that he can’t do anything with these shares for a year after the sale — he is that confident in the company’s future performance.
“I think it’s a fundamentally good investment,” says Butler, whose portfolio includes private shares in gaming, social networking and online dating companies. “Any time you have to watch and wait on a stock it’s a bit nerve-racking, but I can’t see demand for its vehicles going anywhere but up, and I can’t see them not being well capitalized after the IPO.”
Despite the mostly positive interest and swelling number of buyers participating in SharesPost discussions, Dietrick says he has observed some sellers on the SharesPost bulletin board that have expressed concern about the amount of support the company has gotten from the government.
“Some sellers are wondering whether the business will be as economical without all the subsidies and economic support,” he says. Also, the fact that relatively few institutional investors seem to be interested in the stock, compared to the number of retail investors, has prompted some seller discussion on the site.
Analysts have generally been enthusiastic about Tesla’s debut, but less so about its longevity. Gartner, of Pike Research, thinks Tesla CEO Elon Musk has done a good job whipping up hype with his road show presentations to potential investors, but also that the stock price won’t stay up for long.
“It’s not the easiest sell to prospective investors,” he says. “The combination of a lack of a tangible product combined with continuous losses and no timeframe to become profitable makes raising enthusiasm for the IPO very challenging.”
That said, Tesla will probably pull it off, at least for one day. After that, Gartner thinks its trajectory will parallel that of advanced battery company A123Systems. That company, which went public last September, saw a 50 percent jump in its stock price on its first day. But it has slowly declined since, with the company still mired in the red and no profits or breakout products on the horizon.
The only difference is that Gartner doesn’t think Tesla will see as much of a jump in stock price out of the gate as A123 did.
“I don’t expect it to go that high because people have learned their lesson from A123,” he says. “People who bought that stock have seen it recede and lose all its value pretty quickly thereafter.”
That’s not to say that Tesla will be spared the same fate.
